New Jersey commercial markets positioned to thrive in 2001.

The New Jersey office and industrial real estate markets are in great shape, despite talks of cutbacks and slowdowns in corporate America. During 2001, we expect continued demand from tenant groups looking to establish and expand in our dynamic state, with its generous incentives and attractive business environment.

Office Overview

The velocity of New Jersey's office market is amazing in places like Jersey City, where developers are racing to get buildings up fast enough to meet demand. Newark and Princeton are also among the state's most promising submarkets. However, some traditionally strong areas are developing soft spots. For example, a number of large sublease opportunities have come on line in Parsippany.

Still, the outlook for the northern New Jersey office market holds continued promise for investors and developers. A healthy local economy has been bolstered by an unprecedented wave of demand from firms relocating or expanding due to an extremely tight office market in New York City.

During 2000, overall direct rental rates rose approximately 9 percent, to an average of $25.38 per square foot. Class A asking rental rates now stand at $29.66 per square foot -- a $2 increase from 1999. And asking rental rates for new development on the Hudson Waterfront are as high as $40 per square foot. Vacancy rates in northern New Jersey dropped significantly during the first three quarters of 2000, then shot up in the fourth quarter to 11.8 percent -- an increase from last year's 10.6 percent. At the same time, demand helped to boost net absorption for northern New Jersey to 13 million square feet.

The success of Jersey City and other northern markets has had a positive impact on central New Jersey, as growing companies begin to look further south in order to find viable space. The region's improving market fundamentals have already resulted in a substantial increase in activity, with little evidence of an impending downturn.

During 2000, vacancy rates in the central markets plummeted to 8.5 percent from 11.4 percent at year-end 1999. Large blocks of space absorbed along the Route 78 corridor generated much of this positive change. The Somerset and Union County sections of this corridor each posted drops in available space in excess of 20 percent. Overall asking rental rates jumped nearly 7 percent from year-end 1999, to $23.51 per square foot, and Class A rates reached $29.50 per square foot. Activity in Somerset and Middlesex Counties boosted annual net absorption to a healthy 1.9 million square feet.

Office Construction

Despite a long period of rising demand, limited land supplies and stiff lending requirements have kept development in check throughout the state. New projects are being approached with cautious optimism. Questionable economic indicators will keep speculative development in check in the coming year.

Nevertheless, construction is expected to commence on numerous projects in northern New Jersey. This includes SJP Property's Waterfront Corporate Center II in Hoboken, Lefrak's Newport Office Center VII, Hartz Mountain's 77 Hudson in Jersey City, and HINES' Bridgewater Crossing in Bridgewater.

In central New Jersey, several major new developments may help meet demand, including Garden State Hi-Tech Park, LLC's $400 million Garden State Hi-Tech Park in Neptune. Plans call for up to 19 buildings and a hotel/conference center to be built in phases with the first 200,000-squarefoot building scheduled for completion in late 2001. SJP Properties, HINES and Gale & Wentworth have significant developments proposed along the Somerset Route 78 corridor and Patrinely, Boston Properties, MackCali and Brandywine Realty Trust are expected to begin moving forward on projects in the Princeton area.

As always, tenant groups will impact the strength of the market during the coming year. Financial services and pharmaceuticals continue to fuel demand. At the same time, the telecommunications industry has shown a sudden weakness, and announcements of major layoffs will likely translate into a significant amount of square footage coming back onto the market. Additionally, demand by Internet and telecommunications servicing firms appears to have dried up, leaving an abundance of telco hotel space that came onto the market in 2000. Major mergers and acquisitions -- including Honeywell and Allied Signal, Warner Lambert and Pfizer, and Philip Morris and Nabisco -- also will impact New Jersey since the companies left in charge are all based out of state, and their decisions could cause a shift in the long-term.

Industrial Overview

The New Jersey industrial market is as strong as the office market, if not stronger. The combination of the state's central location in the northeast corridor, highly-evolved transportation infrastructure and modern port facilities have helped New Jersey become the third largest industrial real estate market in the nation.

Developers and investors are changing the industrial landscape by adding much needed modern inventory to the state's aging base while upgrading and repositioning older properties. The top industrial developers, including Opus East, Heller Construction, Matrix, Prologis, Charles Klatskin and Keystone Property Trust, continue to dot the landscape with significant warehouse projects. The largest include Heller's 1.1 million-squarefoot complex on Mill Road in Edison, Keystone Cranbury East-West's 985,000-square-foot complex, a 528,000-square-foot warehouse at 24 Englehard Drive and Opus' 526,400-square foot Turnpike Crossing.

Middlesex County maintains its claim as the preferred industrial location statewide, led by the hot Exit 8A submarket. Industry players will watch Exit 8A with interest during the coming months. Upwards of 3 million square feet of speculative construction will be completed, which will result in rate competition. At the same time, it is the only new space in the market, and demand remains strong.

Central New Jersey is also emerging as an attractive location for high-tech companies, with increasing interest in southern Middlesex and Monmouth counties. As an indicator of the area's appeal, available high-tech space in central New Jersey decreased 22 percent during 2000, while rental rates rose 15 percent to average $10.43 per square foot. High-tech firms making long-term commitments in the area included Cisco, JDS Uniphase, Xpedite Systems and GlobeSpan.

In northern New Jersey, the Meadowlands and other submarkets with proximity to Manhattan have become the desired location for new development and witnessed several significant transactions during 2000. On the last two remaining parcels in its Harmon Cove Industrial Park, Hartz Mountain Industries is moving forward on a 338,850-square-foot warehouse facility for Lantis Eyewear and is expected to commence on a similar structure for Corporate Express Office Products in early 2001. In North Bergen, Georgia Pacific leased the entire 616,000-square-foot former Caldor distribution facility. Commensurate with activity, average asking rentals are on the rise and have reached the $6.50 per-square-foot to $7.50 per-square-foot range in hot spots like the Meadowlands.

The investment community capitalized on the opportunity to acquire and reposition diversified assets, resulting in a number of ownership changes in the past year. In the largest transaction of 2000, Schering-Plough Corporation signed an agreement with Novartis Pharmaceuticals Corporation to purchase Novartis' 2 million-squarefoot research and development, laboratory and office complex located on an 88-acre campus in Summit.

Strong demand for warehouse space is expected to continue. While Exit 8A remains the most active submarket, developers will continue to drive development south along the turnpike to Exit 7A, where the approval process for new projects is typically shorter and developers can accommodate larger build-to-suit requirements. Rents will continue to escalate in northern New Jersey due to a lack of space, and developers will continue to reposition older buildings there.

The Bottom Line

With unemployment still low, smart landlords will take advantage of the coming year to start making deals, rather than waiting for asset values to peak. Rental rates will continue to rise through the year, yet indicators dictate that this is the time to become prudent. We will begin to see redevelopments become the next wave as new construction diminishes.

The bottom line for the long-term is that New Jersey's population growth, our highly-educated labor base and our strategic location will always make this a great place to do business. During the coming year, we expect the office and industrial markets to remain strong, although we will begin to see some short-term bumps -- signals of a softening economy -- that are simply part of this cyclical industry.